In recent times, the global economy has been experiencing disruptions in major shipping channels such as the Suez and Panama canals. These disruptions have raised concerns among economists and policymakers due to their potential impact on global trade and inflation. This article will delve into the reasons behind the disruptions, their potential inflationary effects, and the overall implications for the global economy.
The Bottlenecks in the Suez and Panama Canals
The Suez and Panama canals are vital routes for maritime global trade, accounting for approximately 10% and 5% of global trade, respectively. However, recent events have led to significant disruptions in these canals. The Panama Canal Authority has imposed restrictions on the number of ships allowed to pass through the canal due to low water levels. On the other hand, attacks by Houthi militants in the strait of Bab al-Mandab, a passage between the Indian Ocean and the Suez Canal, have prompted some ships to take longer routes around Africa. These disruptions have created bottlenecks in the global supply chain, impacting the flow of goods and increasing shipping costs.
The Link Between Shipping Costs and Inflation
The recent surge in shipping costs has raised concerns among policymakers regarding its potential impact on inflation. Inflation has been a significant concern in recent years, and rising shipping prices from mid-2020 to early 2022 coincided with the surge in inflation. However, it is important to note that the current shipping snarl-up is not on the same scale as previous disruptions. While the cost of shipping a standard container rose by 93% in the week to January 9th, it is still significantly lower than the peak reached in 2022. Therefore, a repeat of pandemic-era inflation is unlikely.
Surveying the Impact on Prices
To assess the impact of shipping costs on prices, surveys of purchasing managers have been conducted. In a survey conducted in September 2021, respondents were 17 times more likely than the long-run average to attribute higher prices to shipping costs. However, in the latest survey, this number has reduced to three times the long-run average. This indicates that business leaders are relatively less concerned about the current shipping crunch. Nevertheless, future surveys may show an increase in concern if the disruptions persist and shipping contracts are renegotiated.
The Mismatch between Supply and Demand
The inflationary impact of bottlenecks in the global supply chain reflects the degree of mismatch between supply and demand. Economists at the annual meeting of the American Economic Association have discussed several papers on this topic. Oleg Itskhoki of the University of California, Los Angeles presented a paper highlighting the more persistent price growth resulting from bottlenecks during the COVID-19 pandemic in America compared to other countries. Ana Maria Santacreu of the St Louis branch of the Federal Reserve found that countries providing more fiscal stimulus, such as the United States, experienced less alleviation of supply chain bottlenecks during the post-pandemic reopening. This suggests that supply constraints are more prevalent during periods of high demand.
The Role of Loose Monetary Policy
Another paper presented by Callum Jones, an economist on the Federal Reserve’s board, supports the idea that bottlenecks exacerbated loose monetary policy and contributed to the rise in inflation. Jones found that bottlenecks explained about half of the rise in inflation from 2021 to 2022. However, it is important to note that the current disruptions in the Suez and Panama canals occur in a different context. Rich-world policymakers are no longer using fiscal and monetary policy to stimulate demand as they did during the pandemic. Additionally, the global economy is not undergoing a significant shift from services to goods, which was another factor contributing to supply chain disruptions.
Assessing the Impact on Demand
In the most recent survey of purchasing managers, respondents were less likely to attribute higher costs to increased demand compared to the long-run average. This indicates that demand is not a significant driver of the current shipping costs. Two years ago, respondents were 75% more likely to point to higher demand as a reason for increased costs. This suggests that the current disruptions in the shipping industry are not primarily caused by surging demand.
The Resilience of Business Leaders
Despite the disruptions in the Suez and Panama canals, business leaders appear to be relatively relaxed about the current crunch. The reduced likelihood of attributing higher costs to increased demand and the lower concern expressed in recent surveys indicate that business leaders have adapted to the current situation. This could be due to a combination of factors, including the expectation of temporary disruptions, the availability of alternative routes, and the gradual recovery of global supply chains.
The Implications for the Global Economy
While the disruptions in the Suez and Panama canals are causing short-term challenges for global trade, the overall implications for the global economy are not expected to be severe. The reduced likelihood of a repeat of pandemic-era inflation, the relative resilience of business leaders, and the absence of significant demand-driven disruptions suggest that the impact on inflation and economic growth will be limited. However, it is important to closely monitor the situation and address any prolonged disruptions that could potentially disrupt global supply chains and impact inflationary pressures.
Conclusion
The disruptions in the Suez and Panama canals have raised concerns about their potential impact on global trade and inflation. However, the current shipping snarl-up is not on the same scale as previous disruptions. While rising shipping costs have historically coincided with inflation, the reduced likelihood of a repeat of pandemic-era inflation suggests that the impact on prices will be limited. Business leaders appear to be relatively relaxed about the current crunch, indicating that they have adapted to the situation. Overall, the global economy is expected to navigate through these challenges with limited long-term implications for inflation and economic growth.